A Cost Effective Analysis of Nigerian LNG

Abstract Nigeria is the latest entrant in the world LNG market. This paper evaluates the economics of Nigerian LNG in light of prevailing trends in the supply, demand and pricing of LNG worldwide. Using competitive netback pricing, the economics of the new Nigerian LNG project is analyzed with respect to the LNG markets in the USA, France, Japan and India. The economics of nearby LNG competitors from Algeria and Qatar are also analyzed. A comparison show that the gas markets in Japan and India are uneconomical for Nigerian LNG. Aggressive marketing is required in the USA and European markets for Nigerian LNG to become competitive with Algerian LNG. Finally, the future prospects for Nigerian LNG are highlighted given stability in current comparative netback prices. Introduction Natural gas is a clean burning fuel. It is the environmentally preferred fuel for power generation. A gas-fired power plant produces no particulate and less gaseous pollutants (CO, CO2 and N2) than a coal-fired plant. The introduction of new technology like the combined-cycle gas technology makes gas-based power generation more economical. A combined cycle gas turbine power plant with the most modern technology will cost less than 50% of a comparable coal fired plant.1 Combined cycle gas turbines have lower capital cost and higher efficiency. Therefore, there is an economic incentive for nations to build gas-fired power plants and diversify their energy base. Liquefied Natural Gas (LNG) has its root in electricity generation. The use of natural gas for peak shaving required the storage of the gas until it was needed for power generation. The natural gas was liquefied and stored in tanks. The liquefaction of natural gas raised the possibility of its transportation to distant destinations. In January 1959, the world's first LNG tanker (the Methane Pioneer) carried a LNG cargo from Lake Charles, LA, USA to Canvey Island, UK. Thus, the world trade in LNG began. The objective of this paper is to examine the economics of Nigerian LNG. The economics of natural gas is different from that of crude oil. It costs four times more to move natural gas by pipeline than it does to move crude oil. In the case of tankers, it cost twelve times more to move natural gas than crude oil.2 Hence, unlike oil reservoirs, gas reservoirs are usually developed in one phase. Gas surface and production facilities must be developed at the onset. This increases the up-front lump investment required for takeoff. The economics of LNG calls for emphasis on liquefaction, transportation and regasification. The LNG chain requires precision to remain viable. Everything must be in place before a contract can be signed and a gas field developed. In short, the LNG must be sold before it is produced. Contracts between buyers and sellers are often long term at fixed prices. The price is very important, requiring about $3.00 per MMBTU in June 2000 to break even. In this paper, we examine the supply, demand, pricing and future prospects of Nigerian LNG. Supply The world natural gas reserves increased by 45.18% from 109,350 bn cm (billion cubic metres) in 1986 to 158,751 bn cm in 1998. Table 1 shows the world proven natural gas reserves by country in 1998. The Middle East had 33.74% of the world proven natural gas reserves. Eastern Europe (including the former USSR) had 36.1% while Africa had 6.8%. The most prominent nations were Russia with 56,677 bn cm, Iran (24,200 bn cm) and Qatar (10,900 bn cm). The three largest fields were the North Field in Qatar and the Urengoi and Yamburg fields in Russia.